Magazine

Just Saying "No" To Uncle Sam

January 22, 2006

When Richard Hawkins, former chief financial officer of McKesson Corp. (MCK), was indicted for securities fraud, prosecutors had some daunting weapons in their arsenal. To develop their case, they had relied heavily on an internal investigative report prepared by Skadden Arps, a law firm retained by McKesson after an accounting scandal engulfed the health-care services company. And at Hawkins' trial last year, Skadden lawyers took the stand to help the government make its case against him.

Hawkins was acquitted in July, 2005, but McKesson's cooperation with the government highlights a matter of growing concern to executives: a fear that they may not be able to trust their own company's lawyers. The root of the problem, according to business advocates, including the U.S. Chamber of Commerce and its allies, is that prosecutors pursuing corporate wrongdoing increasingly are pressuring companies to waive attorney-client privilege if they want to avoid indictment or big fines.

Now a coordinated lobbying effort to rein in this prosecutorial tactic is under way in Congress, at the U.S. Sentencing Commission, and at the U.S. Justice Dept. The campaign has garnered little attention, but it is a critical part of a broader backlash against the 2002 Sarbanes-Oxley Act and other tough laws enacted in the wake of Enron and a cascade of similar accounting scandals. Among those joining the crusade are former Solicitor Generals Theodore B. Olson and Kenneth W. Starr, along with onetime Attorneys General Edwin Meese III and Dick Thornburgh.

"AGENTS OF THE GOVERNMENT"

Corporations are free to waive attorney-client privilege -- the legal rule that protects communications between a lawyer and a client -- because their lawyers work for the company, not individual employees. While that presents an opportunity for investigators, civil liberties groups and business interests see cause for concern. "You're making corporations the agents of the government," says Tracy A. Miner, head of the white-collar defense group at Boston's Mintz, Levin, Cohn, Ferris, Glovsky & Popeo.

Companies, eager to play nice with the feds, are complying, which can set up employees to take a hit. Notes of conversations with company counsel that employees assume to be confidential are readily handed over to investigators, and company-commissioned investigations by lawyers and accountants are coughed up to prosecutors. As a result, class-action attorneys filing private suits frequently get their hands on the material, too, creating a big-money headache for companies in trouble.

Regulators and prosecutors long have sought so-called privilege waivers, but their use started to expand three years ago when then-Deputy Attorney General Larry Thompson penned a memorandum detailing things corporations could do to win brownie points and steer clear of prosecution. Waiving attorney-client privilege was on the list. In November, 2004, the Sentencing Commission issued guidelines giving companies that waive privilege a big break on the size of their fines.

During the past year representatives from the Chamber of Commerce, the American Bar Assn., and the American Civil Liberties Union have met with Justice officials, including acting Deputy Attorney General Robert D. McCallum Jr., to air their concerns. The coalition, which includes the National Association of Manufacturers and a host of other trade groups, also has bombarded the Sentencing Commission with letters and testimony, urging the panel to revisit its 2004 guidelines.

Sentencing Commission members and the Justice Dept. say there's no hard evidence that waiver requests are on the rise and suggest that business is relying on vague anecdotes to make its case. "Justice is not aware of any instance in which the waiver request process has been misused," McCallum said in a written statement to BusinessWeek. Nonetheless, he ordered prosecutors on Oct. 21 to establish oversight of waiver requests. Although his directive was a small victory for business, some corporate lawyers worry that it leaves too much discretion in the hands of prosecutors.

Lobbyists already have the attention of Senate Judiciary Chairman Arlen Specter (R-Pa.), who recently chastised Justice for relying on corporate investigators to undertake the department's legwork. "If the Department of Justice wants to prosecute a company, the Department of Justice has the burden of proof," Specter said in a November speech to a room full of white-collar defense lawyers. "I wouldn't waive my attorney-client privilege if I were you under any circumstances." Business is also urging House Judiciary Committee Chairman F. James Sensenbrenner Jr. (R-Wis.) to hold hearings on the subject this spring, which would give it an opportunity to air its grievances on a broader stage.